Fed Speeches Paint Mixed Outlook – US September Rate Decision Remains up in the Air

The Pound US Dollar exchange rate has continued its climb today as the latest run of UK reports proved better than expected.

The Office for National Statistics reported that both the UK’s manufacturing and industrial production sectors demonstrated growth in July.

Manufacturing production in the UK demonstrated a 0.5% increase, beating June’s flat reading and indeed the forecast of 0.3%. The annual reading was also revealed to have risen, with a 1.9% increase compared to the previous month’s 0.6% and forecast of only 1.7%.

Industrial production also accelerated, hitting growth of 0.2% in July and 0.4% year-on-year.

This news further cemented the Pound’s lead against the US Dollar, which remains crippled in the wake of the North Korean crisis and on-going storms.

Fed Policymakers Deliver Mixed Speeches, What does it Mean for Pound US Dollar?

Various Federal Reserve policymakers have delivered speeches in the build-up to the September 20th rate meeting.

Fed Lael Brainard has positioned herself firmly within the dovish spectrum, claiming on the 5th of September that the Federal Reserve may have simply gotten inflation wrong. Brainard asserted that persistently low inflation is not, in her mind, merely a transitionary thing; that it should be regarded as a warning sign and that interest rates should be put on hold until a semblance of confidence in inflation is achieved.

She stated:

‘I am concerned that the recent low readings for inflation may be driven by depressed underlying inflation, which would imply a more persistent shortfall in inflation from our objective. In that case, it would be prudent to raise the federal funds rate more gradually’.

These comments echo a seemingly dovish trend amongst other officials.

New York Fed President William Dudley, previously hawkish, made no comment about raising rates once more this year (as he had done almost a month prior). Whilst he did still suggest that they were necessary, he now noted that they should be done gradually.

Ultimately the latest speeches shed light on continued intellectual differences within the Fed, further making the likelihood of a September and indeed December rate hike recede.

Whilst a rate hike is not predicted as likely in the September meeting the Fed is, however, expected to announce that they will begin trimming their $4.5T bond portfolio, likely beginning in October.

If this does occur then the US Dollar may find some support, though this is dependent on if the situation with North Korea escalates or de-escalates and indeed the extent of the damage caused by Storm Irma.

BoE Rate Decision on the Horizon – GBP USD Could Maintain Gains

Economists predominantly predict that the BoE will maintain interest rates at 0.25% next week as dovish members continue to outnumber their hawkish counterparts.

Whilst traditionally hawkish members like Ian McCafferty and Michael Saunders are indeed expected to vote for a rate hike, Sir Dave Ramsden will most likely take a similar stance to Governor Mark Carney and indeed Ben Broadbent, two members who have demonstrated caution about the unwinding of the Bank’s stimulus measures.

The meeting on Thursday will take place following Tuesday’s data from the Office for National Statistics, with the UK’s level of inflation likely to come under careful scrutiny.

Inflation in the UK is currently predicted to rise from 2.6% to 2.8%, pushing inflation back towards its four-year high of 2.9%.

Economists believe that this will soon pass, however, with inflation predicted to slip back down in 2018.

‘We believe it is highly unlikely that the Bank of England will raise interest rates any time soon, with growth likely to remain lacklustre over the rest of 2017 and with inflation likely to fall back appreciably in 2018 after peaking around 3% in the latter months of 2017’.

If Archer does prove correct then the Pound US Dollar exchange rate could come under some pressure, though with the US currently suffering devastating storms and political turbulence regarding North Korea, GBP USD could be due to extend its gains even if rates are kept on hold.